The\"impossible Trinity\" refers to the idea that a country can stimultaneously

Question

The"impossible Trinity" refers to the idea that a country can stimultaneously pursue only two of three following policies: free international-capital flows, monetary policy for domestic stabilization, and a fixed exchange rate. for each of the following combinations indicate what the economy gives up by selecting the combination and why the omitted policy cannot be achieved: a. a fixed exchange rate and free international-capital flows. b.a monetary policy for domestic stabilization and a fixed exchange rate c. a monetary policy for domestic stabilization and free international-capital flows.

Explanation / Answer

a. a fixed exchange rate and free international-capital flows but not an independent monetary policy for domestic stablization because setting a domestic interest rate that is different from the world interest rate would undermine a stable exchange rate due to appreciation or depreciation pressure on the domestic currency.

b. .a monetary policy for domestic stabilization and a fixed exchange rate but not n't free international-capital flows because any expansion/contraction in their money supply will be quickly reversed by the reserves' they have to buy or sell to maintain the rate (which is now over or under valued) effect on the money supply

c. a monetary policy for domestic stabilization and free international-capital flows but n't fixed exchange rate because free movement of capital inflow and outflow from the country will create pressure on the value of the currency , so xountry cann't have fixed exchange rate .

If you don't understand anything, then comment, I will revert back on the same.

And If you liked the answer then please do review the same. Thanks :)

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.